The international futures and options
markets have been characterised in recent decades by a handful
of very large exchanges that periodically face and then drive
out of business new entrants, only for the status quo to be
resumed once again.
Famously there are only a small handful of
examples where a new exchange has taken and, crucially, kept
business from a larger incumbent.
This tendency to adhere to
long-established market conventions is not unique to the
derivatives market but it is tempting to say this industry has
changed less in the past decade than any of the currency,
government bond or equity markets.
The method of trading may have changed
(electronic trading is now pre-eminent of course) but the
mechanisms of futures trading, namely the exchanges, are the
same firms that our Grandads traded in the 80s.
There are some early signs that this may
begin to change next year however, and 2016 could be the year
when real competition really takes off in the futures
There are three key markets where 2016
promises greater competition: European rates; the energy
market; and Singapore.
The European interest rates
The European interest rate futures markets
has been dominated for decades by ICE Futures Europe, what used
to be Liffe, and Frankfurt’s Eurex.
Liffe has dominated the short end of the
curve with its euribor and short sterling products and Eurex
has covered the longer dated contracts with its Bund, Bobl,
ICE has established a decent little
business in longer-dated products also but Europe is largely
split between the two markets.
This status quo was initially called into
question in May 2013 when Nasdaq launched NLX, a new entrant
trading both the short and long end of the curve and claiming
hefty saving through portfolio margining.
The new trading platform saw volumes grow
steadily through 2013 and up to the end of last year but
critics were quick to point out this was largely down the
generous rebates NLX was offering clients as incentives.
NLX finally bit the bullet in late 2014,
scrapped the rebates and volumes tanked in a matter of months,
falling from 1.6 million contracts in November to fewer than
10,000 a month six months later.
NLX’s big problem was the new
venue was reliant on its clearer provider LCH to deliver the
portfolio margining that was supposed to make NLX a
But the Nasdaq venue received a
much-needed boost in March when LSE Group, the majority-owner
of LCH, said the European clearing giant would finally support
a portfolio-margining service from the first quarter of next
Portfolio margining is a technique whereby
clearing houses calculate their clients’ net
exposure across a group of assets with similar attributes such
as interest rate swaps and interest rate futures, potentially
offering large derivatives banks decent margin savings.
LCH Swapclear is the world’s
dominant swaps clearing house so any futures exchange, like
NLX, that clears its futures into LCH (assuming the clearing
house supports portfolio margining) could be a viable
alternative to the incumbent markets.
The LSE hinted in March that it could
launch its own futures exchange to rival NLX and confirmed in
October the worst kept secret in the City of London when it
said it planned to launch CurveGlobal, backed by six banks and
CBOE Holdings, in the second quarter of next year.
Curve, like NLX, hopes to draw futures
trading away from ICE and Eurex by offering banks savings as
they trade their rates futures on Curve and clear them in LCH
where they can be offset against the swaps in Swapclear.
NLX and Curve then look set to present
stiff competition to the incumbents Ice and Eurex -- NLX in the
first quarter when the margining service, known as LCH Spider,
goes live and Curve in the second quarter when it is set to
Charlotte Crosswell, the chief executive
of NLX, told FOW LCH Spider and the planned European
introduction of mandatory swaps clearing in June next year are
set to shake-up the market.
"We are optimistic because portfolio
margining and European client clearing are around the corner.
The leverage ratio is causing a huge issue for the banks and,
because of that, we’re seeing an uptick in bank
teams looking for capital efficiencies whereas they had
different priorities this time last time last year."
Crosswell believes the draconian
supplementary leverage ratio being imposed on banks will force
them to look even harder at solutions that allow them to cut
cost, such as portfolio margining.
Michael Davie, the chairman of
CurveGlobal, agreed, adding that several factors point to 2016
being the right time to launch: "Firstly, changes in regulation
have increased the cost of regulatory capital to those trading
derivatives. Secondly, it is increasingly important for
customers that trade futures used to hedge over-the-counter
interest rate derivatives sit alongside their relevant
positions at the same clearing house."
Davie said Swapclear’s 90+%
swaps clearing market share makes LCH Spider attractive to
firms looking "to maximise margin offsets and optimise their
initial margin and default fund capital expenses".
He added: "Looking at the bigger picture,
rate markets have undergone considerable change in recent
years, and market participants are under ever-increasing cost
pressures. There is an industry-wide belief that the interest
rate futures markets would benefit from greater competition for
both clearing and execution."
Cameron Goh, the head of clearing
solutions, SwapClear and listed rates at LCH.Clearnet, said:
"We believe competition is going to heat up next year and open
access is going to be a big part of that. Exchanges have in the
past tried to use their futures to attract over-the-counter
flow, but LCH.Clearnet is now in a great position to use its
multiple currencies, products and international pool of OTC
liquidity to attract the futures market."
LCH Spider is the most interesting thing
to have happened in the European rates market for years. More
interesting will be the reactions to it by ICE and Eurex.
The US and European energy
Nasdaq’s assault on the
European rates market may only be set to take shape next year
but the US exchange opened up on a different front in mid-2015
and could be set to shake up a different duopoly in 2016.
Nasdaq Futures (NFX) launched in late
July, offering for trading most of the main energy contracts
traded on Nymex, part of the CME Group and home of the US
benchmark WTI contract, and ICE Futures Europe, the home of the
European Brent standard.
NFX, which has said it will not charge
trading fees for the first nine months, plans to attract volume
from the incumbents with lower trading and clearing costs,
offered with the Options Clearing Corporation.
The exchange also said in July
that 16 brokers had signed up, naming 14: ABN AMRO Group,
ADM Investor Services, Advantage Futures, Citigroup Global
Markets, ED&F Man Capital Markets, Goldman Sachs, INTL
FCStone, JP Morgan, Merrill Lynch, Mizuho Securities USA,
Phillip Capital, Rosenthal Collins Group, Societe Generale and
Magnus Haglind, the chief executive of
NFX, told FOW in July: "We are targeting a 10% market share
in the first 18-24 months. I think this is achievable."
NFX volumes have been modest so far but
they are showing solid growth, having doubled in September to
reach almost two thirds of a million contracts in
This level is still dwarfed by the vast
trading books of Nymex and ICE, which trade more than that in
a single day, but it’s a start.
Brokers were sceptical at the time of
launch, arguing another exchange showing the same contracts
as an established market but at a lower price is rarely
sufficiently compelling to put a dent in the incumbent.
The lower fees are something, they
argued, but the lower liquidity in the new venues often
equates to additional cost which makes them less attractive
than the incumbents.
NFX has a fight on its hands but with 16
of the world’s largest brokers behind it, it had
a decent chance of upsetting the apple cart.
Singapore has in recent years emerged as
the platform for trading Asia and the world’s
top exchanges have wasted no time in piling into a market
dominated by local favourite the Singapore Exchange.
The Intercontinental Exchange, normally
the incumbent itself, took the plunge on November 17 and
launched ICE Futures Singapore, its first Asian exchange and
the first launched in Asia by a non-Asian firm.
ICE Futures unveiled a mix of contracts:
a one kilo gold future; a mini Brent crude future; a mini
offshore renminbi; a mini onshore renminbi; and a mini low
sulphur gasoil product.
"With a range of contracts across
energy, gold and FX, our Singapore exchange and
clearing house provides market participants with effective
tools for managing price risk locally," said Lucas Schmeddes,
president & chief operating officer at ICE Futures
Singapore and ICE Clear Singapore.
This combination raised some eyebrows
among rivals who questions the demand for the gold and
currency products but three weeks in and the energy contracts
are progressing well, according to ICE data.
ICE’s launch is potentially
only the start however, as CME group has made Singapore its
home and appointed in March Chris Fix, the former chief
executive of the Dubai Mercantile Exchange, as its Asian
CME has not gone public on any plans to
launch an exchange or clearing house in the region however,
unlike Eurex which had initially planned to go live with its
exchange and clearing hub at the end of the year but said in
September it had decided to put back the launch by 18 months
to the middle of 2017.
A source familiar with the matter said
the decision to delay the launch had been taken to allow the
exchange to focus on other "more-pressing development work,"
such as its clearing business, adding that the delay comes
after and is linked to the organisation’s new
structure under chief exec Carsten Kengeter who assumed that
role in early June.
Competition is Singapore can only
increase next year as ICE ramps up its business and Eurex
starts to flex its muscles in the region.